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. e du/thir dc ir c uit_1997/210Filed August 27, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96

- 1638

QUEEN CITY PIZZA, INC.; THOMAS C. BOLGER; SCALE

PIZZA, INC.; BAUGHANS, INC.; CHARLES F. BUCK; F.M.

PIZZA, INC.; ROBERT S. BIGELOW; BLUE EARTH

ENTERPRISES, I NC.; KEVIN BORES; DAVIS PIZZA

ENTERPRISES, INC.; DIANE A. DAVIS; FISHER PIZZA,

INC.; JAMES B. FISHER, JR.; SEPCO, INC.; S&S PIZZA

CORP.; G&L PIZZA CO.; STEPHEN D. GALLUP; LUGENT

PIZZA, INC.; JOSEPH J. LUGENT; BILLIO'S PIZZA, INC.;

WILLIAM J. MURTHA; S PRING GARDEN PIZZA, INC;

BRAD L. WALKER; JRW PIZZA, INC.; JAMES R. WOOD,

Individually and as Class Representatives of a Class

Consisting of All Present and Certain Former Domino's

Franchisees in the United States; INTERNATIONAL

FRANCHISE ADVISORY COUN CIL, INC.

v.

DOMINO'S PIZZA, INC.

Queen City Pizza, Inc.; Thomas C.

Bolger; Scale Pizza, Inc.; Baughans,

Inc.; Charles F. Buck; F.M. Pizza, Inc.;

Robert S. Bigelow; Blue Earth

Enterprises, Inc.; Kevin Bores; Davis

Pizza Enterprises, Inc.; Diane A. Davis;

Fisher Pizza, Inc.; James B. Fisher, Jr.;

SEPCO, Inc.; S&S Pizza, Inc.; G&L

Pizza, Inc.; Stephen D. Gallup; Lugent

Pizza, Inc.; Joseph J. Lugent; Billio's

Pizza, Inc.; William J. Murtha; Spring

Garden Pizza, Inc.; Brad L. Walker;

JRW Pizza, Inc.; James R. Wood; and

International Franchise Advisory

Council, Inc.,

Appellants

On Appeal from the United States Distri ct Court

for the Eastern District of Pennsylvania

(D.C. Civil Action No. 95

- cv

- 03777)

Argued February 28, 1997Before: SCIRICA, ALITO and LAY,* Circuit Judges

(Filed August 27, 1997)

SHERYL G. SNYDER, ESQUIRE

(ARGUED)

Brown, Todd & Hayburn

3200 Providian Center

Louisville, Kentucky 40202

Attorney for Appellants

DANIEL F. KOLB, ESQUIRE

(ARGUED)

THOMAS P. OGDEN, ESQUIRE

Davis, Polk & Wardwell

450 Lexington Avenue

New York, New York 10017

LAURENCE Z. SHIEKMAN, ESQUIRE

Pepper , Hamilton & Scheetz

18th and Arch Streets

3000 Two Logan Square

Philadelphia, Pennsylvania 19103

-

2799

Attorneys for Appellee

_________________________________________________________________

*The Honorable Donald P. Lay, United States Circ uit Judge for the

Eighth Judicial Circuit, sitting by designation.

2

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this appeal, we must decide whether certain franchise

tying restrictions support a claim for violation of federal

antitrust laws. Eleven franchisees of Domino's Pizza stores

and the International Franchise Advisory Council, Inc. filed

suit against Domino's Pizza, Inc., alleging violations of

federal antitrust laws, breach of contract, and tortious

interference with contract. The district court dismissed the

antitrust claims under Fed. R. Civ. P. 12(b)(6) for failure to

state a claim for which relief can be granted, because the

plaintiffs failed to allege a valid relevant market. The

di strict court declined to exercise supplemental jurisdiction

over the plaintiffs' remaining common law claims. Queen

City Pizza, Inc. v. Domino's Pizza, Inc., 922 F. Supp. 1055(E.D. Pa. 1996). We will affirm.

I. Facts and Procedural History

A.

Domino's Pizza, Inc. is a fast

- food service company that

sells pizza through a national network of over 4200 stores.

Domino's Pizza owns and operates approximately 700 of

these stores. Independent franchisees own and operate the

remaining 3500. Domino' s Pizza, Inc. is the second largest

pizza company in the United States, with revenues in

excess of $1.8 billion per year.

A franchisee joins the Domino's system by executing a

standard franchise agreement with Domino's Pizza, Inc.

Under the franchis e agreement, the franchisee receives the

right to sell pizza under the "Domino's" name and format.

In return, Domino's Pizza receives franchise fees and

royalties.

The essence of a successful nationwide fast

- food chain is

product uniformity and cons istency. Uniformity benefits

franchisees because customers can purchase pizza from

3

any Domino's store and be certain the pizza will taste

exactly like the Domino's pizza with which they are familiar.

This mean s that individual franchisees need not build up

their own good will. Uniformity also benefits the franchisor.

It ensures the brand name will continue to attract and hold

customers, increasing franchise fees and royalties.1

For these reasons, section 12.2 of the Domino's Pizza

standard franchise agreement requires that all pizza

ingredients, beverages, and packaging materials used by a

Domino's franchisee conform to the standards set by

Domino's Pizza, Inc. Section 12.2 also provides that

Domino's Pizza, Inc. "may in our sole discretion require that

ingredients, supplies and materials used in the preparation,

packaging, and delivery of pizza be purchased exclusively

from us or from approved suppliers or distributors."

Domino's Pizza reserves th e right "to impose reasonable

limitations on the number of approved suppliers or

distributors of any product." To enforce these rights,

Domino's Pizza, Inc. retains the power to inspect franchisee

stores and to test materials and ingredients. Section 1 2.2 is

subject to a reasonableness clause providing that Domino's

Pizza, Inc. must "exercise reasonable judgment with respect

to all determinations to be made by us under the terms of

this Agreement."Under the standard franchise agreement, Domino's Pizza,

Inc. sells approximately 90% of the $500 million in

ingredients and supplies used by Domino's franchisees.2

These sales, worth some $450 million per year, form a

significant part of Domino's Pizza, Inc.'s profits.

Franchisees purchase only 10% of their ingredients and

supplies from outside sources. With the exception of fresh

dough, Domino's Pizza, Inc. does not manufacture the

products it sells to franchisees. Instead, it purchases these

products from approved suppliers and then resells th em to

the franchisees at a markup.

_________________________________________________________________

1. See the analysis of the economics of franchising in Warren S. Grimes,

When Do Franchisors Have Market Power?, 65 Antitrust L.J. 105, 107

-

110 (19 96).

2. Domino's Pizza, Inc. sells ingredients and supplies through its

division, Domino's Pizza Distribution Division, "DPDD." DPDD was

formerly a subsidiary of Domino's Pizza, Inc.

4

B.

The plaintiffs in this case are eleven Domino's franchisees

and the International Franchise Advisory Council,

Inc. ("IFAC"), a Michigan corporation consisting of

approximately 40% of the Domino's franchisees in the

United States, formed to promote their common interests .3

The plaintiffs contend that Domino's Pizza, Inc. has a

monopoly in "the $500 million aftermarket for sales of

supplies to Domino's franchisees" and has used its

monopoly power to unreasonably restrain trade, limit

competition, and extract supra

- com petitive profits. Plaintiffs

point to several actions by Domino's Pizza, Inc. to support

their claims.

First, plaintiffs allege that Domino's Pizza, Inc. has

restricted their ability to purchase competitively priced

dough. Most franchisees purchase all of their fresh dough

from Domino's Pizza, Inc. Plaintiffs here attempted to lower

costs by making fresh pizza dough on site. They contend

that in response, Domino's Pizza, Inc. increased processing

fees and altered quality standards and inspection practices

for store

- produced dough, which eliminated all potential

savings and financial incentives to make their own dough.

Plaintiffs also allege Domino's Pizza, Inc. prohibited stores

that produce dough from selling their dough to other

franchisees , even though the dough

- producing stores were

willing to sell dough at a price 25% to 40% below Domino'sPizza, Inc.'s price.

Next, plaintiffs object to efforts by Domino's Pizza, Inc. to

block IFAC's attempt to buy less expensive ingredients and

su pplies from other sources. In June 1994, IFAC entered

into a purchasing agreement with FoodService Purchasing

Cooperative, Inc. (FPC). Under the agreement, FPC was

appointed the purchasing agent for IFAC

- member Domino's

franchisees. FPC was charged wit h developing a cooperative

purchasing plan under which participating franchisees

_________________________________________________________________

3. Domino's Pizza, Inc. argued before the district court that IFAC is

without standing in this case. Qu een City Pizza, Inc. v. Domino's Pizza,

Inc., 922 F. Supp. 1055, 1057 (E.D. Pa. 1996). The district court

apparently found it unnecessary to address this issue in light of its

order

dismissing the case for failure to state a claim.

5

could obtain supplies and ingredients at reduced cost from

suppliers other than Domino's Pizza, Inc. Plaintiffs contend

that when Domino's Pizza, Inc. became aware of these

efforts, it intentionally issued ingredient and supply

s pecifications so vague that potential suppliers could not

provide FPC with meaningful price quotations.

Plaintiffs also allege Domino's Pizza entered into exclusive

dealing arrangements with several franchisees in order to

deny FPC access to a pool o f potential buyers sufficiently

large to make the alternative purchasing scheme

economically feasible. In addition, plaintiffs contend

Domino's Pizza, Inc. commenced anti

- competitive predatory

pricing to shut FPC out of the market. For example, they

m aintain that Domino's Pizza, Inc. lowered prices on many

ingredients and supplies to a level competitive with FPC's

prices and then recouped lost profits by raising the price on

fresh dough, which FPC could not supply. Further,

plaintiffs contend Domin o's Pizza, Inc. entered into

exclusive dealing arrangements with the only approved

suppliers of ready

- made deep dish crusts and sauce. Under

these agreements, the suppliers were obligated to deliver

their entire output to Domino's Pizza, Inc. Plaintiff s allege

the purpose of these agreements was to prevent FPC from

purchasing these critical pizza components for resale to

franchisees.

Finally, plaintiffs allege Domino's Pizza, Inc. refused to

sell fresh dough to franchisees unless the franchisees

purchased other ingredients and supplies from Domino's

Pizza, Inc. As a result of these and other alleged practices,plaintiffs maintain that each franchisee store now pays

between $3000 and $10,000 more per year for ingredients

and supplies than it w ould in a competitive market.

Plaintiffs allege these costs are passed on to consumers.

C.

As noted, eleven Domino's franchisees and IFAC filed an

amended complaint in United States District Court for the

Eastern District of Pennsylvania against D omino's Pizza,

Inc. seeking declaratory, injunctive, and compensatory

relief under SS 1 and 2 of the Sherman Act, 15 U.S.C. SS 1

6

and 2. The plaintiffs also sought damages for breach of

contract, breach of impl ied covenants of good faith and fair

dealing, and tortious interference with contractual relations.4

Domino's Pizza, Inc. moved to dismiss the antitrust

claims for failure to state a claim, contending the plaintiffs

failed to allege a "relevant marke t," a basic pleading

requirement for claims under both S 1 and S 2 of the

Sherman antitrust act. They maintained that the relevant

market defined in the complaint

-- the "market" in

Domino's

- approved ingredients and supplies used by

Domino's Pizza fra nchisees

-- was invalid as a matter of

law because the boundaries of the proposed relevant

market were defined by contractual terms contained in the

franchise agreement, and not measured by cross

- elasticity

of demand or product interchangeability.

T he district court granted defendant's motion to dismiss

with prejudice plaintiffs' federal antitrust claims. The

district court observed that "in order to state a Sherman

Act claim under either S 1 or S 2, a plaintiff must identify

the relevant product and geographic markets and allege

that the defendant exercises market power within those

markets." Queen City Pizza, Inc. v. Domino's Pizza, Inc., 922

F. Supp. 1055, 1060 (E.D. Pa. 1996). Noting that plaintiffs

did "not explicitly identify the relevan t product and

geographic markets in their amended complaint," the court

said that "it is clear from the context, and confirmed in

their memorandum in opposition to the instant motion,

that Plaintiffs consider the relevant product market to be

the mark et for ingredients and supplies among Domino's

franchisees." Id. at 1061. Rejecting this concept of the

relevant market, the court held that "antitrust claims

predicated upon a `relevant market' defined by the bounds

of a franchise agreement are not co gnizable." Id. at 1063.

The court noted that Domino's Pizza, Inc.'s power to force

plaintiffs to purchase ingredients and supplies from themstemmed "not from the unique nature of the product or

_________________________________________________________ ________

4. The plaintiffs originally filed the complaint on behalf of themselves

and

a purported class of all present and future Domino's franchisees in the

United States. Their amended complaint abandoned their claim to

represent all Domino's franc hisees.

7

from its market share in the fast food franchise business,

but from the franchise agreement." Id. at 1062. For that

reason, plaintiffs' claims "implicate principles of contract,

and are not the concern of the antitrust laws." Id. The

district court also held plaintiffs had failed adequately to

allege harm to competition, "a bedrock premise of antitrust

law." Id. at 1063. Because plaintiffs failed to assert a

cognizable antitrust claim and there was neither diversity

among the parties nor special circumstances justifying

exercise of supplemental jurisdiction, the court dismissed

without prejudice plaintiffs' common law claims for lack of

subject matter jurisdiction. Id. at 1063

- 64.

The district court granted plaintiffs leave to file an

amended complaint to cure the jurisdictional pleading

deficiencies in their state law claims. Plaintiffs decided not

to replead their state law claims. Instead, they sought to

amend their complaint for a secon d time in an attempt to

state a valid federal antitrust claim. The district court

denied their motion, noting that though the plaintiffs'

proposed second amended complaint would cure the failure

to plead harm to competition, it would not cure the failu re

to allege a valid relevant market. The court stated:

"Plaintiffs do not and cannot purchase ingredients and

supplies from alternative suppliers not because Domino's

dominates the ingredient and supply market or because

Defendant is the market's onl y supplier, but because the

franchisee

- plaintiffs are contractually bound to purchase

only from suppliers approved by Defendant. It is economic

power resulting from the franchise agreement, therefore,

and not market power, that defines the `relevant ma rket'

Plaintiffs allege in support of their antitrust claims." The

district court rejected plaintiffs' argument that a different

result was required under the Supreme Court's decision in

Eastman Kodak Co. v. Image Technical Services, Inc., 504

U.S. 45 1 (1992). This appeal followed.

II. Jurisdiction and Standard of Review

The district court had jurisdiction over the antitrust

counts under 15 U.S.C. SS 15 and 26 and 28 U.S.C.SS 1331 and 1337. It declined to exercise supplemental

jurisdiction ov er the common law counts. We have

8

jurisdiction under 28 U.S.C. S 1291. Our review of the

district court's dismissal under Fed. R. Civ. P. 12(b)(1) and

12(b)(6) is plenary. Stehney v. Perry, 101 F.3d 925 (3d Cir

. 1996).

III. Discussion

Plaintiffs assert six distinct antitrust claims on appeal.

First, plaintiffs allege Domino's Pizza, Inc. has monopolized

the market in pizza supplies and ingredients for use in

Domino's stores, in violation of S 2 of the Sherman Act, 15

U.S.C. S 2. In support of this contention, plaintiffs allege

Domino's Pizza, Inc. has sufficient market power to control

prices and exclude competition in this market. Second,

plaintiffs contend Domino's Pizza, Inc. has attempted to

mo nopolize the market for Domino's pizza supplies and

ingredients, in violation of S 2 of the Sherman Act. Third,

plaintiffs allege Domino's Pizza, Inc.'s exclusive dealing

arrangements have unreasonably restrained trade in

violation of S 1 of the Sherma n Act, 15 U.S.C.S 1. Fourth,

plaintiffs allege Domino's Pizza, Inc. imposed an unlawful

tying arrangement5 by requiring franchisees to buy

ingredients and supplies from them as a condition of

obtaining fresh dough, in violation of the Sherman Act S 1,

15 U.S.C. S 1. Fifth, plaintiffs allege Domino's Pizza, Inc.

imposed an unlawful tying arrangement by requiring

franchisees to buy ingredients and supplies "as a condition

of their continued enjoyment of rights and services under

their Standard Franch ise Agreement," in violation of S 1 of

the Sherman Act, 15 U.S.C. S 1. Sixth, plaintiffs allege

Domino's Pizza, Inc. has monopoly power in a relevant

"market for reasonably interchangeable franchise

opportunities facing prospective franchisees," in vio lation of

S 2 of the Sherman Act, 15 U.S.C. S 2. This last claim was

not raised before the district court.

As we have noted, the district court held that none of the

_________________________________________________________________

5. "In a tying arrangement, the seller sells one item, known as the tying

product, on the condition that the buyer also purchases another item,

known as the tied product." Allen

- Myland, Inc. v. International Business

Machines Corp., 33 F.3d 194, 200 (3d Cir. 1994).

9plaintiffs' antitrust claims was cognizable under federal law.

We will analyze each claim in turn.

A.

As a threshold matter, plaintiffs argue that "relevant

market determinations are inherently fact intensi ve, and

therefore are inappropriate for disposition on a Rule

12(b)(6) motion." (Appellant's brief at 16). It is true that in

most cases, proper market definition can be determined

only after a factual inquiry into the commercial realities

faced by co nsumers. See Eastman Kodak Co. v. Image

Technical Services, Inc., 504 U.S. 451, 482 (1992). Plaintiffs

err, however, when they try to turn this general rule into a

per se prohibition against dismissal of antitrust claims for

failure to plead a relevant market under Fed. R. Civ. P.

12(b)(6).

Plaintiffs have the burden of defining the relevant market.

Pastore v. Bell Telephone Co. of Pennsylvania , 24 F.3d 508,

512 (3d Cir. 1994); Tunis Bros Co., Inc. v. Ford Motor Co.,

952 F.2d 715, 726 (3d Cir. 1 991). "The outer boundaries of

a product market are determined by the reasonable

interchangeability of use or the cross

- elasticity of demand

between the product itself and substitutes for it." Brown

Shoe Co. v. U.S., 370 U.S. 294, 325 (1962); Tunis Bro thers,

952 F.2d at 722 (same). Where the plaintiff fails to define

its proposed relevant market with reference to the rule of

reasonable interchangeability and cross

- elasticity of

demand, or alleges a proposed relevant market that clearly

does not enc ompass all interchangeable substitute

products even when all factual inferences are granted in

plaintiff 's favor, the relevant market is legally insufficient

and a motion to dismiss may be granted. See, e.g., TV

Communications Network, Inc. v. Turner Network Television,

Inc., 964 F.2d 1022, 1025 (10th Cir. 1992) (affirming

district court's dismissal of claim for failure to plead a

relevant market; proposed relevant market consisting of

only one specific television channel defined too narrowly);

To wer Air, Inc. v. Federal Exp. Corp., 956 F. Supp. 270

(E.D.N.Y. 1996) ("Because a relevant market includes all

products that are reasonably interchangeable, plaintiff's

failure to define its market by reference to the rule of

10

reasonable interchangeability is, standing alone, valid

grounds for dismissal."); B.V. Optische Industrie De Oude

Delft v. Hologic, Inc., 909 F. Supp. 162 (S.D.N.Y. 1995)

(dismissal for failure to plead a valid relevant market;

plaint iffs failed to define market in terms of reasonableinterchangeability or explain rationale underlying narrow

proposed market definition); Re

- Alco Industries, Inc. v. Nat'l

Center for Health Educ., Inc., 812 F. Supp. 387 (S.D.N.Y.

1993) (dismissal for failure to plead a valid relevant market;

plaintiff failed to allege that specific health education

product was unique or explain why product was not part of

the larger market for health education materials); E.& G.

Gabriel v. Gabriel Bros., Inc., No. 93 Civ. 0894, 1994 WL

369147 (S.D.N.Y. 1994) (dismissal for failure to plead valid

relevant market; proposed relevant market legally

insufficient because it clearly contained varied items with

no cross

- elasticity of demand).

B.

Plaintiffs allege Domino's Pizza, Inc. has willfully acquired

and maintained a monopoly in the market for ingredients,

supplies, materials and distribution services used in the

operation of Domino's stores, in violation of S 2 of the

Sherman Act, 15 U.S.C. S 2. Section 2 sanctions those "who

shall monopolize, or attempt to monopolize, or combine or

conspire with any other person or persons, to monopolize

any part of the trade or commerce among the several

states, or with foreign nations." "The offense of monopoly

un der S 2 of the Sherman Act has two elements: (1) the

possession of monopoly power in the relevant market and

(2) the willful acquisition or maintenance of that power as

distinguished from growth or development as a

consequence of a superior product, bu siness acumen, or

historic accident." Aspen Skiing Co. v. Aspen Highlands

Skiing Corp., 472 U.S. 585, 596 n. 19 (1985) (quoting

United States v. Grinnell Corp., 384 U.S. 563, 570

- 71

(1966)). See also Ideal Dairy Farms, Inc. v. John Labatt,

Ltd., 90 F. 3d 737, 749 (3d Cir. 1996) (same); Bonjourno v.

Kaiser Aluminum & Chemical Corp., 752 F.2d 802, 808 (3d

Cir. 1984) (same).

11

The district court dismissed plaintiffs' S 2 monopoly

claims for failure to plead a v alid relevant market. Plaintiffs

suggest the "ingredients, supplies, materials, and

distribution services used by and in the operation of

Domino's pizza stores" constitutes a relevant market for

antitrust purposes. We disagree.

As we have noted, the outer boundaries of a relevant

market are determined by reasonable interchangeability of

use. Eastman Kodak Co. v. Image Technical Services, Inc.,

504 U.S. 451, 482 (1992); Brown Shoe Co. v. U.S. , 370 U.S.

294, 325 (1962); Tunis Brothers Co., Inc. v. Ford Motor Co.,

952 F.2d 715, 722 (3d Cir. 1991). "Interchangeabilityimplies that one product is roughly equivalent to another

for the use to which it is put; while there may be some

degree of preference for the one over the other, either would

work effectively. A person needing transportation to work

could accordingly buy a Ford or a Chevrolet automobile, or

could elect to ride a horse or bicycle, assuming those

options were feasible." Allen

- Myland, Inc. v. International

Business Machines Corp., 33 F.3d 194, 206 (3d Cir. 1994)

(internal quotations omitted). When assessing reasonable

interchangeability, "[f]actors to be considered include price,

use, and qualities." Tunis Brothers, 952 F.2d at 722.

Reasonable interchangeability is also indicat ed by"cross

elasticity of demand between the product itself and

substitutes for it." Brown Shoe Co. v. U.S., 370 U.S. 294,

325 (1962). As we explained in Tunis Brothers Co., Inc. v.

Ford Motor Co., 952 F.2d 715, 722 (3d Cir. 1991), "products

in a rel evant market [are] characterized by a cross

- elasticity

of demand, in other words, the rise in the price of a good

within a relevant product market would tend to create a

greater demand for other like goods in that market." Tunis

Brothers, 952 F.2d at 7 22.6

_________________________________________________________________

6. Cross

- elasticity is a measure of reasonable interchangeability. As one

treatise observes: "The economic tool most commonly referred to in

determining what should be included in the market from which one then

determines the defendant's market share is cross

- elasticity of demand.

Cross

- elasticity of demand is a measure of the substitutability of

products from the point of view of buyers. More technically, it measures

the respo nsiveness of the demand for one product to changes in the

price of a different product." E. Thomas Sullivan and Jeffrey L. Harrison,

Understanding Antitrust and its Economic Implications 217 (1994).

12

Here, the dough, tomato sauce, and paper cups that meet

Domino's Pizza, Inc. standards and are used by Domino's

stores are interchangeable with dough, sauce and cups

available from other suppliers and used by other pizza

companies. Indeed, it is the availability of interchangeable

ingredients of comparable quality from other suppliers, at

lower cost, that motivates this lawsuit. Thus, the relevant

market, which is defined to include all reasonably

interchangeable products, cannot be restricted solely to

thos e products currently approved by Domino's Pizza, Inc.

for use by Domino's franchisees. For that reason, we must

reject plaintiffs' proposed relevant market.

Of course, Domino's

- approved pizza ingredients and

supplies differ from other available ingre dients and supplies

in one crucial manner. Only Domino's

- approved products

may be used by Domino's franchisees without violatingsection 12.2 of Domino's standard franchise agreement.

Plaintiffs suggest that this difference is sufficient by itself to

create a relevant market in approved products. We

disagree. The test for a relevant market is not commodities

reasonably interchangeable by a particular plaintiff, but

"commodities reasonably interchangeable by consumers for

the same purposes." United States v. E.I. du Pont de

Nemours & Co., 351 U.S. 377, 395 (1956); Tunis Brothers,

952 F.2d at 722. A court making a relevant market

determination looks not to the contractual restraints

assumed by a particular plaintiff when determining whether

a pro duct is interchangeable, but to the uses to which the

product is put by consumers in general. Thus, the relevant

inquiry here is not whether a Domino's franchisee may

reasonably use both approved or non

- approved products

interchangeably without trigger ing liability for breach of

contract, but whether pizza makers in general might use

such products interchangeably. Clearly, they could. Were

we to adopt plaintiffs' position that contractual restraints

render otherwise identical products non

- interchang eable for

purposes of relevant market definition, any exclusive

dealing arrangement, output or requirement contract, or

franchise tying agreement would support a claim for

violation of antitrust laws. Perhaps for this reason, no court

has defined a re levant product market with reference to the

13

particular contractual restraints of the plaintiff.7 Indeed,

the only cases we have found involving similar claims

rejected plaintiffs' position as a matter of law. See United

Farmers Agents Ass'n, Inc. v. Farmers Ins. Exchange, 89

F.3d 233 (5th Cir. 1996) ("Economic power derived from

contractual arrangements such as franchises or in this

case, the agents' contract with Farmers', has nothing to do

with market po wer, ultimate consumers' welfare, or

antitrust.") (internal citation and quotation omitted), cert.

denied, ___ U.S. ___, 117 S. Ct. 960 (1997); Ajir v. Exxon

Corp., No. C 93

- 20830, 1995 WL 429234, *3 (N.D. Ca.)

("Just because Exxon's direct serve deale rs may

contractually purchase gasoline from only one source

--

Exxon

-- does not mean that the relevant market is Exxon

gasoline"; the correct relevant market is all gasoline). See

also Seagood Trading Corp. v. Jerrico, Inc., 924 F.2d 1555,

1570 n. 39 (11th Cir. 1991) (declining to reach issue but

noting the district court rejected plaintiffs' claim that

proposed market for sales of supplies to Long John Silver's

fast food stores was a relevant market for antitrust

purposes).

Plaintiffs argue tha t the Supreme Court's decision

defining relevant markets in Eastman Kodak Co. v. ImageTechnical Services, Inc., 504 U.S. 451 (1992) requires a

different outcome. We disagree.

In Kodak, the Supreme Court observed that a market is

defined with refere nce to reasonable interchangeability.

Kodak, 504 U.S. at 482. The Court held that the market for

repair parts and services for Kodak photo

- copiers was a

valid relevant market because repair parts and services for

Kodak machines are not interchangeable with the service

and parts used to fix other copiers. Id. Plaintiffs suggest

that Kodak supports its proposed relevant market because

it indicates that in some circumstances, a single brand of

___________________________________________________________ ______

7. In Mozart Co. v. Mercedes

- Benz of North America, 833 F.2d 1342 (9th

Cir. 1987), the Court of Appeals for the Ninth Circuit observed that

market power exists in three circumstances: where the government has

granted a seller a patent or simil ar monopoly, where the seller possesses

a unique product, or where the seller possesses a high market share. Id.

at 1345

- 1346. The court made no mention of contractual limitations as

a source of market power.

14

a product or service may constitute a relevant market. This

is correct where the commodity is unique, and therefore not

interchangeable with other products. But here, it is

uncontested that contractual restraints aside, the sauce,

dough, and other pro ducts and ingredients approved for

use by Domino's franchisees are interchangeable with other

items available on the market.

Plaintiffs contend that they face information and

switching costs that "lock them in" to their position as

Domino's franchis ees, making it economically impracticable

for them to abandon the Domino's system and enter a

different line of business. They argue that under Kodak, the

fact that they are "locked in" supports their claim that an

"aftermarket" for Domino's

- approved s upplies is a relevant

market for antitrust purposes. We believe plaintiffs misread

Kodak.

The defendants in Kodak argued that there was no

relevant market in Kodak repair parts, even if they were

unique and non

- interchangeable with other repair part s,

because of cross

- elasticity of demand between parts prices

and copier sales. If the price of parts were raised too high,

defendants contended, it would decrease demand for copiers.8

The Court held that whether there was cross

- elasticity of

demand b etween parts and copiers was, in this case, a

factual question that could not be determined as a matter

of law. The Court reached this conclusion becauseswitching and information costs arise when one purchases

an expensive piece of equipment like a co pier. In some

circumstances, these costs might create an economic lock

in that could reduce or eliminate the cross

- elasticity of

_________________________________________________________________

8. In a typical antitrust case, plaintiffs assert that the products or

services in their proposed relevant market are reasonably

interchangeable because they possess positive cross

- elasticity of

demand: a rise in the price of one product in the market will increase

demand for the other items in the market . By contrast, in Kodak the

defendants argued that Kodak copier parts, though not reasonably

interchangeable with the copiers themselves, were not a relevant market

because of negative cross

- elasticity between parts and copiers: an

increase in the pric e of parts would, they argued, decrease demand for

copiers using those parts.

15

demand between copiers and the repair parts for those

copiers.

Kodak, we believe, held that a plaintiff's proposed

relevant mar ket in a unique and non

- interchangeable

derivative product or service cannot be defeated on

summary judgment by a defendant's assertion that the

proposed derivative market is cross

- elastic with the primary

market, if there is a reasonable possibility t hat the

defendant's assertion about cross

- elasticity is factually

incorrect. But Kodak does not hold that the existence of

information and switching costs alone, such as those faced

by the Domino's franchisees,9 renders an otherwise invalid

relevant m arket valid.10 In Kodak, the repair parts and

service were unique and there was a question of fact about

cross

- elasticity. Judgment as a matter of law was therefore

inappropriate. Here, it is uncontroverted that Domino's

approved supplies and ingredie nts are fully interchangeable

in all relevant respects with other pizza supplies outside the

proposed relevant market. For this reason, dismissal of the

plaintiffs' claim as a matter of law is appropriate.

Kodak is distinguishable from the present ap peal in other

important respects. The Kodak case arose out of concerns

about unilateral changes in Kodak's parts and repairs

policies. When the copiers were first sold, Kodak relied on

purchasers to obtain service from independent service

providers. L ater, it chose to use its power over the market

in unique replacement parts to squeeze the independent

_________________________________________________________________

9. A franchisee considering exiting one franchise system faces

information costs associated with researching alternative investmentopportunities and switching costs stemming from the loss of invested

funds that may not be recovered if it abandons its current business and

start

- up costs associated with the new venture.

10. If Kod ak repair parts had not been unique, but rather, could be

obtained from additional sources at a reasonable price, Kodak could not

have forced copier purchasers to buy repair parts from Kodak. This

would be true even if the copier purchasers faced inform ation and

switching costs that locked them into to use of Kodak copiers. This fact

indicates that switching and information costs alone cannot create

market power. Rather, it is the lack of a competitive market in the object

to be purchased

-- for inst ance, a competitive market in Kodak parts

-- that gives a company market power.

16

service providers out of the repair market and to force

copier purchasers to obtain service directly from Kodak, at

higher cost. Because this change in policy was not foreseen

at the time of sale, buyers had no ability to calculate these

higher costs at the time of purchase and incorporate them

into their purchase decision. In contrast, plaintiffs here

knew that Domino's Pizza retained significant power over

their ability to purchase cheaper supplies from alternative

sources because that authority was spelled out in detail in

section 12.2 of the standard franchise agreement. Unlike

the plaintiffs in Kodak, the Domino's franc hisees could

assess the potential costs and economic risks at the time

they signed the franchise agreement. The franchise

transaction between Domino's Pizza, Inc. and plaintiffs was

subjected to competition at the pre

- contract stage. That

cannot be sa id of the conduct challenged in Kodak because

it was not authorized by contract terms disclosed at the

time of the original transaction. Kodak's sale of its product

involved no contractual framework for continuing relations

with the purchaser. But a fr anchise agreement regulating

supplies, inspections, and quality standards structures an

ongoing relationship between franchisor and franchisee

designed to maintain good will. These differences between

the Kodak transaction and franchise transactions ar e

compelling.11

Plaintiffs also contend that Virtual Maintenance, Inc. v.

Prime Computer, Inc., 11 F.3d 660 (6th Cir. 1993), supports

their claim that the boundaries of a relevant market may be

defined by contract. In Virtual Maintenance, Ford Motor Co.

granted Prime Computer an exclusive right to market Ford

designed software and software revisions that automobile

design companies must use to design cars for Ford. Prime

Computer sold the software revisions only in a package

with uncompetitive hardware maintenance services. The

Court of Appeals for the Sixth Circuit held that Prime couldnot legally exercise its monopoly power over software

revisions to force customers to buy unwanted hardware

maintenance contracts. Plaintiffs note that Prim e's de facto

monopoly power over software stemmed from a contract

_________________________________________________________________

11. See Alan Silberman, The Myths of Franchise "Market Power", 65

Antitrust L.J. 181, 217 (1996).

17

with Ford, which they argue implies that the boundaries of

a market may be defined by contract. But Prime had a

monopoly because it possessed a unique product that no

one else sold. Since the product was unique, and not

interch angeable with any other products, it constituted its

own relevant market for antitrust purposes. By contrast,

Domino's does not sell a unique product or service.

Franchisees must buy Domino's

- approved supplies and

ingredients not because they are uniqu e, but because they

are obligated by contract to do so.

Were we to accept plaintiffs' relevant market, virtually all

franchise tying agreements requiring the franchisee to

purchase inputs such as ingredients and supplies from the

franchisor would vi olate antitrust law. Courts and legal

commentators have long recognized that franchise tying

contracts are an essential and important aspect of the

franchise form of business organization because they

reduce agency costs and prevent franchisees from fr ee

riding

-- offering products of sub

- standard quality

insufficient to maintain the reputational value of the

franchise product while benefitting from the quality control

efforts of other actors in the franchise system. 12 Franchising

is a bedrock of the American economy. More than one third

of all dollars spent in retailing transactions in the United

States are paid to franchise outlets.13 We do not believe the

antitrust laws were designed to erect a serious barrier to

this form of business orga nization.14

_________________________________________________________________

12. See Mozart Co. v. Mercedes

- Benz of North America, Inc., 833 F.2d

1342, 1349

- 50 (9th Cir. 1987); Alan J. Meese, Antitrust Balancing in a

(Near) Coasean World: The Case o f Franchise Tying Contracts, 95 Mich.

L. Rev. 111, 117

- 119 (1996); Warren S. Grimes, When Do Franchisors

Have Market Power?, 65 Antitrust L.J. 105 145

- 47 (1996); Benjamin

Klein and Lester F. Saft, The Law and Economics of Franchise Tying

Contracts, 28 J.L. & Econ. 345, 346

- 48 (1985).

13. Warren S. Grimes, When Do Franchisors Have Market Power?, 65

Antitrust L.J. 105, 105 n.1 (1996).

14. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 387 (1967)(Stewart, J., concurring in part and dissen ting in part) ("Indiscriminate

invalidation of franchising arrangements would eliminate their creative

contributions to competition and force suppliers to abandon franchising

and integrate forward to the detriment of small business. In other words,

we may inadvertently compel concentration by misguided zealousness.")

(internal quotations omitted). The majority's opinion in Arnold was later

overturned. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36

(1977).

18

The purpose of the Sherman Act "is not to protect

businesses from the working of the market; it is to protect

the public from the failure of the market." Spectrum Sports,

Inc. v. McQuillan, 506 U.S. 447, 458 (1993). Here, plaintiffs'

acce ptance of a franchise package that included purchase

requirements and contractual restrictions is consistent with

the existence of a competitive market in which franchises

are valued, in part, according to the terms of the proposed

franchise agreement and the availability of alternative

franchise opportunities. Plaintiffs need not have become

Domino's franchisees. If the contractual restrictions in

section 12.2 of the general franchise agreement were viewed

as overly burdensome or risky at the time they were

proposed, plaintiffs could have purchased a different form

of restaurant, or made some alternative investment.15 They

chose not to do so. Unlike the plaintiffs in Kodak, plaintiffs

here must purchase products from Domino's Pizza not

because of Domino's market power over a unique product,

but because they are bound by contract to do so. If

Domino's Pizza, Inc. acted unreasonably when, under the

franchise agreement, it restricted plaintiffs' ability to

purchase supplies from other sources, plaintiffs' remedy, if

any, is in contract, not under the antitrust laws. 16

For these reasons, we agree with the district court that

plaintiffs have not pleaded a valid relevant market.17

_____________________________________________________________ ____

15. As one scholar has noted, there are thousands of franchise

opportunities available to investors and disclosure laws to help them

make informed choices about these alternatives. George A. Hay, Is the

Glass Half

- Empty or Half

- Full?: Reflection s on the Kodak Case, 62

Antitrust L.J. 177, 188 (1993).

16. The dissent contends Domino's has acted in a "predatory way." But

plaintiffs may have a right to sue for breach of contract.

17. The reasoning adopted by the district court in this case ha s been

criticized recently by two other district court decisions. See Wilson v.

Mobil Oil Corp., 940 F. Supp. 944 (E.D. La. 1996); Collins v.

InternationalDairy Queen, Inc., 939 F. Supp. 875 (M.D. Ga. 1996). In Wilson, the

court disagreed with the dis trict court's interpretation of Kodak, arguing

that under Kodak information and switching costs alone, absent a

unique product or service, may create a relevant market for antitrust

purposes. As noted above, we disagree with this interpretation, for the

Supreme Court specifically found that the copier parts involved in the

19

C.

Plaintiffs' claim for attempt to monopolize fails for the

same reasons. To prevail on an attempted monopolization

claim under S 2 of the Sherman Act, "a plaintiff must prove

that the defendant (1) engaged in predatory or anti

competitive conduct with (2) specific intent to monopolize

and with (3) a dangerous probability of achieving monopoly

power." Spectrum Sports, Inc. v. McQu illan , 506 U.S. 447,

456 (1993). Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90

F.3d 737, 750 (3d Cir. 1996); Advo, Inc. v. Philadelphia

Newspapers, Inc., 51 F.3d 1191, 1197 (3d Cir. 1995). In

order to determine whether there is a dangerous probabil ity

of monopolization, a court must inquire "into the relevant

product and geographic market and the defendant's

economic power in that market." Spectrum Sports, Inc. v.

McQuillan, 506 U.S. 447, 459 (1993); Ideal Dairy Farms at

750; Pastore v. Bell Te lephone Co. of Pennsylvania, 24 F.3d

508, 512 (3d Cir. 1994).

Plaintiffs' attempted monopoly claim is predicated on the

identical proposed relevant market underlying its monopoly

claim: a market in the ingredients, supplies, and materials

used by Do mino's pizza stores. Because the products within

this proposed market are interchangeable with other

products outside of the proposed market, the claim was

properly dismissed.

D.

Plaintiffs allege exclusive dealing arrangements entered

into by Do mino's Pizza, Inc. have unreasonably restrained

_________________________________________________________________

case were unique. The basis of the Collins court's criticism of the

district

court's decision here is less clear, though it appears the c ourt believed

that the district court's holding was too expansive. The Collins court

apparently wished to reserve judgment whether some franchise tying

arrangements might be deemed anti

- competitive in the future. The

approach taken by the district cour t in this case has received support in

recent scholarly literature. See Alan J. Meese, Antitrust Balancing in a

(Near) Coasean World: The Case of Franchise Tying Contracts, 95 Mich.L. Rev. 111, 128 (1996) ("economic theory suggests . . . that tying

co ntracts that actually reduce free riding are unrelated to any exercise

of market power"); Alan H. Silberman, The Myths of Franchise "Market

Power", 65 Antitrust L.J. 181 (1996).

20

trade in violation of S 1 of th e Sherman Act, 15 U.S.C. S 1.

Section 1 of the Sherman Act provides: "Every contract,

combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the

several states, or with foreign nations, is declared to be

illegal." 15 U.S.C. S 1.

To establish a section 1 violation for unreasonable

restraint of trade, a plaintiff must prove (1) concerted action

by the defendants; (2) that produced anti

- competitive

effects within the relevant product and geographic mark ets;

(3) that the concerted action was illegal; and (4) that the

plaintiff was injured as a proximate result of the concerted

action. Mathews v. Lancaster General Hospital , 87 F.3d

624, 639 (3d Cir. 1996); Orson Inc. v. Miramax Film Corp.,

79 F.3d 13 58, 1366 (3d Cir. 1996); Petruzzi's IGA

Supermarkets, Inc. v. Darling

- Delaware Co., Inc., 998 F.2d

1224, 1229 (3d Cir. 1993).

Plaintiffs allege defendant's actions caused anti

competitive effects within the market for ingredients and

supplies used by Domino's pizza stores. Again, this claim

fails because the products within the proposed market are

interchangeable with products outside the proposed

market.18

E.

Plaintiffs allege Domino's Pizza, Inc. imposed an unlawful

____________________ _____________________________________________

18. Monopoly power under S 2 requires "something greater" than market

power under S 1. Kodak, 504 U.S. at 481. This does not imply, however,

that the analyses employed in the two types of cases to define r elevant

markets differ. In the past, we intimated that the relevant market

analysis required under S 2 of the Sherman Act was "instructive" in S 1

cases, though perhaps not identical. See Tunis Bros., 952 F.2d at 724 n.

3. The Supreme Court and lower c ourts have consistently held that

relevant markets under both sections are defined by the same two

factors: reasonable interchangeability of use and cross

- elasticities of

demand. See, e.g., Allen

- Myland , 33 F.3d at 201 and 201 n. 8 (applying

Brown Sho e relevant market test of reasonable interchangeability and

cross

- elasticity of demand in S 1 tying case). In this case, we see no

difference in the relevant market analyses required under the two

provisions.21

tying arrangement by requiring franchisees to buy

ingredients and supplies from them as a condition of

obtaining Domino's Pizza fresh dough, in violation of S 1 of

the Sherman Act, 15 U.S.C. S 1. "In a tying arrangement,

the seller sells one item, kno wn as the tying product, on the

condition that the buyer also purchases another item,

known as the tied product." Allen

- Myland, Inc. v.

International Business Machines Corp., 33 F.3d 194, 200

(3d Cir. 1994). "[T]he antitrust concern over tying

arrange ments is limited to those situations in which the

seller can exploit its power in the market for the tying

product to force buyers to purchase the tied product when

they otherwise would not, thereby restraining competition

in the tied product market." Id. "Even if a seller has

obtained a monopoly in the tying product legitimately (as by

obtaining a patent), courts have seen the expansion of that

power to other product markets as illegitimate and

competition suppressing." Town Sound and Custom Tops,

Inc. v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d Cir.

1992). "The first inquiry in any S 1 tying case is whether the

defendant has sufficient market power over the tying

product, which requires a finding that two separate product

markets exist and a determination precisely what the tying

and tied products markets are." Allen

- Myland, 33 F.3d at

200

- 201.

Here, plaintiffs allege Domino's Pizza, Inc. used its power

in the purported market for Domino's

- approved dough to

force plaintiffs to buy un wanted ingredients and supplies

from them. This claim fails because the proposed tying

market

-- the market in Domino's

- approved dough

-- is not

a relevant market for antitrust purposes. Domino's dough

is reasonably interchangeable with other brands of pizza

dough, and does not therefore constitute a relevant market

of its own. All that distinguishes this dough from other

brands is that a Domino's franchisee must use it or face a

suit for breach of contract. As we have noted above, the

particular co ntractual restraints assumed by a plaintiff are

not sufficient by themselves to render interchangeable

commodities non

- interchangeable for purposes of relevant

market definition. If Domino's had market power in the

overall market for pizza dough and fo rced plaintiffs to

purchase other unwanted ingredients to obtain dough,

22

plaintiffs might possess a valid tying claim. But where thedefendant's "power" to "force" plaintiffs to purchase the

alleged tying prod uct stems not from the market, but from

plaintiffs' contractual agreement to purchase the tying

product, no claim will lie. For that reason, plaintiffs' claim

was properly dismissed.

F.

Plaintiffs allege Domino's Pizza, Inc. imposed an unlawful

t ie

- in arrangement by requiring franchisees to buy

ingredients and supplies "as a condition of their continued

enjoyment of rights and services under their Standard

Franchise Agreement," in violation of S 1 of the Sherman

Act, 15 U.S.C. S 1. This claim is meritless. Though plaintiffs

complain of an illegal tie

- in arrangement, they have failed

to point to any particular tying product or service over

which Domino's Pizza, Inc, has market power. Domino's

Pizza's control over plaintiffs' "continued enjoy ment of

rights and services under their Standard Franchise

Agreement" is not a "market." Rather, it is a function of

Domino's contractual powers under the franchise

agreement to terminate the participation of franchisees in

the franchise system if the y violate the agreement. Because

plaintiffs failed to plead any relevant tying market, the

claim was properly dismissed.

G.

On appeal, the plaintiffs advance a new claim based on

a different relevant market theory

-- that Domino's has a

monopoly in a relevant market comprised of pizza franchise

opportunities of the type that Domino's Pizza, Inc. offers.

Plaintiffs raise this new theory, which the district court did

not address, in the hopes of obtaining a remand.

Plaintiffs' argument that Do mino's Pizza has monopolized

a relevant market comprised of franchise opportunities of a

particular sort was not raised or mentioned in their

complaint, first amended complaint, memorandum of law in

support of their motion for leave to file a second am ended

complaint, or in the "claims for relief" section of the

proposed second amended complaint. When the district

23

court denied plaintiffs leave to file a second amended

complaint, on grounds of futility, it had no idea that

plaintiffs intended or desired to raise such a claim. "This

court has consistently held that it will not consider issues

that are raised for the first time on appeal." Harris v. City

of Philadelphia, 35 F.3d 840, 845 (3d Cir. 1994).Nonetheless, plaintiffs argue that this claim was raised

before the district court. In support of this contention, they

note that facts which might support such a claim were

pleaded in paragraphs 60 and 65 of their proposed second

amended complaint. T hough we construe pleadings

liberally, plaintiffs have a duty to make the district court

aware that they intend to rely on a particular relevant

market theory. This is particularly true in a complex case

like this one, where plaintiffs bring multiple a ntitrust

claims based on multiple and alternative relevant market

theories. See Pastore v. Bell Telephone Co. of Pennsylvania,

24 F.3d 508, 513 (3d Cir. 1994) (plaintiff bound by

relevant market theory raised before district court); TV

Communications Network. Inc. v. Turner Network Television,

Inc., 964 F.2d 1022, 1025 (10th Cir. 1992) (same); Edward

J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 117

(3d Cir. 1980) (same). We do not believe a fleeting reference

in a proposed second amended complaint to facts that

might support a proposed relevant market is sufficient, on

its own, to preserve that relevant market theory for

appellate review. See Frank v. Colt Industries, Inc., 910 F.2d

90, 100 (3d Cir. 1990) (issues not raised before dist rict

court are waived on appeal; fleeting reference to issue

before district court insufficient to preserve it for appellate

review). "Particularly where important and complex issues

of law are presented, a far more detailed exposition of

argument is required to preserve an issue." Id. at 100.

Because this claim was not properly raised before the

district court and is not properly before us, we decline to

address it. See generally Salvation Army v. Department of

Community Affairs of State of N.J., 919 F.2d 183, 196 (3d

Cir. 1990) ("The matter of what questions may be taken up

and resolved for the first time on appeal is one left

primarily to the discretion of the courts of appeals, to be

exercised on the facts of each case.").

24

H.

Plaintiffs also contend the district court held that the

availability of contract remedies prohibited recovery under

antitrust laws. But this misstates the district court's

holding. The district court held that Domino's Pizza's ability

to block franchisees from purchasing ingredients from other

sources stemmed from its exercise of contractual powers,

not market power, and the remedy for this problem lies, if

at all, under contract law. The court did not say that as a

matter of law the availability of common law remedies

prohibits recovery under an antitrust theory. We see no

error.I.

The district court declined to exercise supplemental

jurisdiction over the plaintiffs' remaining state law contract

claims. T his decision is committed to the sound discretion

of the district court. Stehney v. Perry, 101 F.3d 925, 939

(3d Cir. 1996); Growth Horizons, Inc. v. Delaware County,

Pa., 983 F.2d 1277, 1284

- 85 (3d Cir. 1993). Because all

federal claims were correctly dismissed and dismissal of the

remaining contract claims would not be unfair to the

litigants or result in waste of judicial resources, we see no

abuse of discretion.

IV.

For the foregoing reasons, we will affirm the judgment of

the district cou rt.

25

LAY, Circuit Judge, dissenting.

I respectfully dissent.

The district court, at the pleading stage, dismissed

plaintiffs' complaint alleging violations under S 1 and S 2 of

the Sherman Antitrust Act h olding that plaintiffs failed to

allege a relevant market. The issue is complex. Judge

Scirica's opinion is logically reasoned. Our differences lie in

the interpretation and application of the Supreme Court's

recent opinion in Eastman Kodak Co. v. Imag e Technical

Servs., Inc., 504 U.S. 451 (1992). I respectfully submit, for

the reasons that follow, that the district court's opinion in

this case rests on several incorrect hypotheses. To the

extent that the majority adopts the district court's

ration ale, I dissent.

The district court rejected as a matter of law the

plaintiffs' alleged relevant market, that of the derivative

aftermarket for ingredients and supplies among Domino's

Pizza, Inc. ("DPI")'s franchisees. The district court found

that " [t]he economic power DPI possesses results not from

the unique nature of the product or from its market share

in the fast food franchise business, but from the franchise

agreement."1

_________________________________________________________________

1. The district court relied on "two influential commentators," Benjamin

Klein and Lester F. Saft, The Law and Economics of Franchise Tying

Contracts, 28 J.L. & Econ. 345, 356 (1985) and two pre

- Kodak cases,

Mozart Co. v. Mercedes

- Benz of North America, Inc. , 833 F.3d 1342 (9th

Cir. 1987), and Tominaga v. Shepard, 682 F. Supp. 1489 (C.D. Cal.1988). The district court adopted the Ninth Circuit's analysis from

Mozart that an alleged economic

- lock

- in is irrelevant to the

determination of a defendant's market power. See Tominaga, 682 F.

Supp. at 1494 (quoting Mozart, 833 F.2d at 1346

- 47). This reasoning is

simply irreconcilable with the Supreme Court's analysis of information

and switching costs in Kodak. See Kodak, 504 U.S. at 473

- 77.

It should a lso be noted Professor Klein recognized, contrary to his

original thesis, that Kodak permits the recognition of market power in a

derivative aftermarket "despite the absence of market power in the

equipment market, by taking advantage of imperfectly inf ormed

consumers that become `locked

- in' to their existing Kodak equipment."

See Benjamin Klein, Market Power in Antitrust: Economic Analysis After

Kodak, 3 Sup. Ct. Econ. Rev. 43, 48 (1993).

26

The plaintiffs al lege that DPI has harmed the competitive

process by "foreclos[ing] interbrand competition in the

market for distributing approved Ingredients and Supplies

to Domino's franchisees." The plaintiffs argue that DPI

prevented a franchise cooperative and oth er distributors of

ingredients and supplies from entering that market. By

stopping any interbrand competition for ingredients and

supplies for DPI franchisees, DPI, according to the

pleadings, has excluded other potential distributors, and

thereby pre empted market forces from disciplining the sale

of ingredients and supplies.

Interchangeability

In adopting the district court's approach to relevant

market definition, the majority reasons that all ingredients

and supplies, whether or not approve d by DPI, are

interchangeable for making pizzas generally and therefore

must be included within the relevant market. Kodak made

a similar argument. As in Kodak, this ignores the reality

that there are no substitutes for ingredients and supplies

sold o nly by DPI. The majority's approach to the

interchangeability concept is not faithful to the purpose of

interchangeability analysis or the Supreme Court's

understanding of market definition and power. The purpose

of analyzing interchangeability is to f ind competing

products which are reasonable substitutes and thereby

prevent market power.2 In Kodak, the question was whether

the cross

- elasticity of demand between the equipment

market and the derivative aftermarkets for parts and

service was suffici ent to deprive Kodak of market power.

Our question is whether the interchangeability of, or cross

elasticity of demand between, DPI

- approved ingredients and

supplies and other ingredients and supplies is sufficient to

make the alleged relevant market invalid. The issue,whether under the framework of market power as it was in

Kodak, or as market definition as here, is whether

_________________________________________________________________

2. The basic definition of market power is "the power to raise prices

above competitive levels without losing so many sales that the price

increase is unprofitable." Herbert Hovenkamp, Federal Antitrust Policy:

The Law of Competition and its Practice S 3.1, at 79 (1994) (footnote

omitted).

27

competition from other providers of ingredients and

supplies for pizzas will restrain the power of DPI over

ingredients and supplies it sells to franchisees. See Kodak,

504 U.S. at 469 n.15. The plaintiffs allege not only tha t

they are limited to buying ingredients and supplies from

DPI, but also that information and switching costs

prevented them from anticipating and being able to respond

to DPI's power to substantially raise price for the

ingredients and supplies. They allege that competition from

independent providers of ingredients and supplies does not

restrain DPI's power in the aftermarket for ingredients and

supplies, and therefore ingredients and supplies not

approved by DPI need not be included in the releva nt market.3

Information and Switching Costs

A closely related problem with the district court's opinion

is its scant treatment of information and switching costs

and their relevance to defining a valid relevant market. The

plaintiffs argue that th ey have experienced information and

switching costs which have prevented them from

_________________________________________________________________

3. The majority, in footnote 17, ante at 20, states that the district

court's

approach has "received support in recent scholarly literature," citing

Alan J. Meese, Antitrust Balancing in a (Near) Coasean World: The Case

of Franchise Tying Contracts, 95 Mich. L. Rev. 111, 128 (1996). However,

Professor Meese does not argue that the approach taken is cor rect under

current antitrust law. In fact, on page 126 he concedes that the Kodak

decision "found that the existence of relationship

- specific investments

can confer `market power' ", and at 152

- 55 he states that "under current

law" franchisors may have market power over derivative aftermarkets

due to "lock

- in" of the franchisees, and because of this he proposes a

new framework for analyzing such claims. He argues that "the focus on

market power and less restrictive alternatives, though perfectly natu ral

given the partial equilibrium framework that dominates antitrust law

and the premises that underlie tying jurisprudence," does not properly

apply to the franchise tying context. Id. at 128. Professor Meese argues

that tying contracts that reduce fr ee riding, a form of opportunisticbehavior taken at the expense of the franchise system, should be prima

facie legal. Whatever the value of Professor Meese's argument, he

presupposes that "under current law" from the Supreme Court the

district court i n this case may have erred. Id. at 152. In addition, it is

not even clear that Professor Meese would find the plaintiffs' allegations

insufficient as a matter of law because they allege that DPI charged

supracompetitive prices for the ingredients and su pplies. See id. at 155.

28

anticipating or responding to the price increases for

ingredients and supplies from DPI. They argue that these

information and switching costs create a "lock

- in" which

makes the afterm arket for DPI

- approved ingredients and

supplies the relevant market. Specifically, the imperfect

information they proffer is that the franchisees "could not

foresee that Domino's would not follow the policy

represented in its Offering Circular and woul d, instead,

commence excluding potential suppliers in order to

foreclose competition in the aftermarket." They suggest

switching costs arise from sunk costs in the franchise,

limits on franchisees's ability to sell their franchise, and

noncompetition covenants in the Standard Franchise

Agreement.

An important part of the Supreme Court's decision in

Kodak that the plaintiffs presented a triable claim was that

"there is a question of fact whether information costs and

switching costs foil the simp le assumption that the

equipment and service markets act as pure complements to

one another." Kodak, 504 U.S. at 477. In fact, other circuit

courts have held that the presence of these market

imperfections was the crucial factor in Kodak, and that had

Kodak's policy been known at the time businesses bought

copiers from Kodak, the result would have been different.4

See PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F.3d 811,

820 (6th Cir. 1997) ("We likewise agree that the change in

policy in Kodak was the crucial factor in the Court's

decision. By changing its policy after its customers were

`locked in,' Kodak took advantage of the fact that its

customers lacked the information to anticipate this

change."), cert. denied, 1997 WL 195257; see als o Digital

Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756, 763

(7th Cir. 1996); Lee v. Life Ins. Co. of North America, 23

_________________________________________________________________

4. This conclusion seems quite sensible. If Kodak custo mers knew about

Kodak's subsequent parts

- and

- service policy when they bought the

copiers, or were not economically restricted from switching to other

copiers, then Justice Scalia's dissent, which assumes a perfect

competition/perfect information world, should be right. Kodak is merely

a concession to fact that markets do not always work perfectly, andsometimes, but not always, these imperfections can create sufficient

market power to justify possible antitrust liability.

29

F.3d 14, 20 (1st Cir. 1994). Several commentators have

described how the analysis from Kodak could mean that

franchisors' derivative aftermarkets may be relevant

antitrust markets. Meese, 95 Mich. L. Rev. at 152 ("Under

current law, [p ost

- contract market power] can arise once

the cost to the franchisee of switching to a different

franchise is significant. . . ."); Warren S. Grimes, When Do

Franchisors Have Market Power? Antitrust Remedies For

Franchisor Opportunism, 65 Antitrust L.J . 105, 112 (1996)

("A franchisor has market power if it can, without losing

substantial sales, raise the price of a good or service sold to

a franchisee above the level at which an equivalent good or

service is available from other suppliers."); see al so Robert

H. Lande, Chicago Takes It On The Chin: Imperfect

Information Could Play A Crucial Role In The Post

- Kodak

World, 62 Antitrust L.J. 193, 195 (1993) ("Another

important lesson of Kodak is that imperfect information can

be a crucial factor in d efining relevant markets."). But see

Alan Silberman, The Myths of Franchise "Market Power", 65

Antitrust L.J. 181, 217 (1996).

Uniqueness

In rejecting the plaintiffs' theory that the information and

switching costs they face justify the alleged re levant market

under Kodak, the majority states: "Kodak does not hold

that the existence of information and switching costs alone,

such as those faced by the Domino's franchisees, renders

an otherwise invalid relevant market valid." Ante at 16

(footnot es omitted). Both the district court and the majority

make a more difficult argument, that a necessary factor in

Kodak was that the repair parts were "unique." They state

that this uniqueness is what gave Kodak market power,

and that the lack of this f actor herein warrants rejecting

the plaintiffs' alleged relevant market. The basis for not

applying Kodak in this case lies in two arguments: (1) the

aftermarket ingredients and supplies are not unique, and

(2) the franchisees knew of the policy bec